Hi,

I am a US citizen working in CH, married to a Swiss citizen. We plan to return to the US this year, my husband has been granted a greencard and will therefore become taxe liable some time this year.

We recently had a conversation with our tax advisor, and he mentioned something pretty scary regarding US taxes on my Swiss husband's 2nd and 3rd pilar: if we plan to cash out my husband's money in there (which is possible, since we leave CH for good), he will have to pay income taxes on that full amount in the US (well, minus the CH taxes, but given the amount, the US taxes will still be somwhere around 17%).

If the above is true, the same would apply to my 2nd pilar employer contribution and interest (my own contribution was always included as income on my US returns, hence has been taxed in the US) as well as the interest on my 3a pilar amount (which I did not include as income the last years)

Is this really the case??? That would be a shame, since my husband earned that money way before becoming US tax liable... Any experiences from anyone in this area are much appreciated!

rog, You've posed several different questions, so please be patient as we try to sort them out.

No, not "will become" but "has already become". He is a "US person" for purposes of the tax code for the (entire) calendar year beginning whenever he received the "green card." Therefore, he has to file a US tax return (if he has taxable income) & file an FBAR form.

Yes, per the Article 18 of the US-CH tax treaty, distributions from pensions (or similar arrangements) are taxed by the country of residence, but only by that country. So, if he is resident in the US for the year during which he receives the distributions, they are taxable by the US and not by CH. (You do not pay taxes to both countries.)

Note that where you are tax resident is determined for each calendar (tax) year; per the US (and all OECD-based) tax treaties, there is no such thing as being "tax resident" in two countries in any one calendar year. (If there is a dispute, per the tax treaty, it is up to the two gov'ts to resolve the matter.)

So, as a practical matter, if you are moving to the US in 2012, do so after mid-July, so that you will have spent more than 6 months' time in CH. (That is not an iron-clad ruls for determining tax residency, but from what you posted here it is a very safe strategy.) Then, he can take the withdrawal while CH-resident, and the amount is not taxable by the US.

Yes & No (you raised two questions). (1) The employer contribution is taxable income as far as the US is concerned, in the year it was made, since the "pillar" arrangements are not treated as a US pension. If you never declared them, you should have, but whether or not to bother now is a different topic. (2) The interest earned by a CH pension is not taxable by the US until the funds are withdrawn (assuming you are a US-resident in that year).

If that's not clear, please ask again. You might also wish to read the US-CH tax treaty regarding pensions. The CH versions of its tax treaties are here. The IRS has English-language versions of the tax treaties, but the amending protocols are separate (there is no "current version").

First of all, thanks a lot for your detailed explanations!


OK, so basically our fear was unsubstantiated (should maybe consider switching our tax advisor??) Since we are planning to move only towards end of Q3, that should work then. Phew!

OK, here again the explanation of the tax advisor was that it is easier to tax "everything at once" at the time of withdrawal (i.e. my contribution + employer contribution + interest) instead of tax part of it (my contribution + employer contribution) regularly and then reduce the taxable amount by my contributions at the time of withdrawal. Based on what you mentioned, this would probably only be an accepted approach if the 3a funds are withdrawn as a US resident...

I think that, if you need a tax advisor, you should a professional who is licensed in the country whose taxes are relevant. There are threads on this forum recommending CH residents who are US-licensed tax advisors (a US "CPA" or US attorneys).

I have been amazed at the number of tax advisors in Europe (CH, UK & FR) who pretend to know US law, and may believe they do, but give very incorrect advice. Fluency in language is one issue but so is "how the law should be read" (which in the US means: generalizations, followed by definitions, followed by listed exceptions; if you don't read all three, you won't understand the law).

Alternatively (and my suggestion), invest a long weekend (week?) in reading. The US tax forms are numerous, but not very complicated for individual taxpayers, and between the IRS and Google, you can usually find answers to what you need for your personal situation. Once you understand that, the annual aggravation of tax forms will be easy.

I am not sure I understand your question, and I can't help you regarding CH tax law. However, I suspect there is a misunderstanding: For the US, your contribution to a foreign pension is (generally) not tax-deductible, therefore it is not taxable on withdrawal. (Otherwise, you would be taxed twice on the same income.) Neither is the employer's contribution taxable on withdrawal (since you should have paid tax on it when contributed), and that leaves only the appreciation (interest).

So, I would guess, the US tax will be lower than the CH tax, but you need to take a sharp pencil & paper, and do the arithmetic.

He actually is an enrolled agent...

Sorry for not being clear, I was only talking about the US part of taxation. What I was trying to say: there are supposedly two ways (at least that is what I was told): either do NOT include any income related to 2nd/3rd pillar in the yearly tax return, but report everything at withdrawal as income, OR include the 2nd/3rd pillar amounts paid by the employee in the yearly income, and then deduct that portion once the withdrawal happens and only pay income tax on the employer's contribution + interest. So the first way would be easier from an administration perspective.

Not sure what you mean by this?

An "enrolled agent" is generally not a CPA or attorney; neither a CPA nor an attorney need or benefit from "enrolled agent" registration, and in practice either would lose status from such registration.

To address the boldface above:

(1) No, "everything at withdrawal" is not taxable by the US, so unless you have a passionate desire to contribute to the federal deficit......??

(2) No, withdrawals of the employee contributions are not taxable, ever, since (as I wrote earlier) they were from after-tax income (to the US). (Did you mean to write "employer" contributions? They aren't reportable on withdrawal either, since they should have been reported & taxed on contribution.)

(3) The employer's contribution should have been reported when made, but if you wish to argue "no", then yes, on withdrawal you could elect to report that amount plus interest. I would never do that, but it is an option.

From what you wrote, you should have reported the employer contributions as income in the year they were made, but perhaps you did not. That does not mean you owe US tax (the tax credit for CH taxes, and the earned income exclusion, each apply). So, either review this with your tax advisor, or just ignore it.

Do the arithmetic, and compare the tax you would pay to CH if you withdraw the pension this year (as CH tax residents) with the tax you would pay to the US if you withdraw next year (as US tax residents).

Thanks for above, I think I got it now

Oh, and as per this:

I think the math is pretty easy: CH tax rate is about 5% (if the vested benefits account is located in Kanton Schwyz), I don't think the US can compete with this rate...

This message is for jwalker54. Just so I have a clear understanding to the above, if we were residents of Switzerland at the time we withdrew our Pillar2 and paid Swiss Taxes on that withdraw, is it correct that we don't need to claim the Swiss pension withdraw on our US taxes? Apologies for any duplications. Many thanks.

Short answer: yes, that is correct.

Longer answer: Per Article 18 of the US-CH tax treaty, distributions or income from pensions or "similar" arrangements are taxable only by your country of residence for the year in which that income or distribution occurs. (Your country of residence in prior or in subsequent years is not relevant for this issue.)

The US Treasury Dept published a "Technical Explanation" of the US-CH treaty, which states: "The term 'pensions and other similar remuneration' includes amounts paid by all private retirement plans and arrangements in consideration of past employment, regardless of whether they are qualified plans under U.S. law...." [Emphasis added.]

Be very careful what advice you take.

Be very careful of those who believe only attorneys can consult on US tax matters.

Be very careful if you use US based or mostly US experienced US tax professionals, most do not have a clue about the foreign issues you need advice on.

The Pillar system can be a surprise to US Citizens here, in terms of how it impacts their US taxes.

Your husband is in the US tax net at time greencard was issued I assume this was 2012. So, any tax issues need to be resolved by 15 April 2013 to be filed in the US.

It is possible dual status issues could occur but without details, not going into now.

PILLAR 2:

You should be reporting employer contributions as income on your return. There is debate as to whether this is Line 7 or Line 21, but in any case, S.911 foreign earned income exclusion can not be applied.

Your tax advisor / preparer should have prepared and attached a basis tracker at the back of your returns.

If, which seems may be the case, your accountant did not attach a basis tracker, or report employER contributions, then you will only have basis in the employEE contributions from the time you were reporting gross Swiss income on US return. Be sure to work this out so you know what you have already paid tax on.

Up until now your husbands income has been completed outside US tax net I assume, i.e. no elections to treat him as resident to benefit from married filing joint status, thus needing to reporting his income.

Therefore, it really depends on residency determinations, time of withdrawl, time of green card issue etc to determine what if any will be taxable in the US.

PILLAR 3:

It makes sense to report the growth each year in the plan. But that is all.

But another question is what is in the Pillar 3? Is this a cash only plan? Are there mutual funds in the plan? Often pillar 3 plans have optional fund management. IF this is the case, you possibly have Form 8621 filing requirements, and these can be compliance fee heavy due to the reporting requirements. Pillar 3 is rarely a good option for a US citizen.

I would suggest, be very careful about a "tax advisor" from something called "US Tax & Financial Services, Sarl" (link) who is trolling this forum for clients.

That is very interesting, for several reasons:

i never set up that page and curious who did

Nor do I work there, I used to though mind.

Nor do I need to scout for clients since most clients here aren't the clients we're interested in taking i.e. their issues are not complex enough, or they want a cheap accountant and to provide a shoebox of docs i.e. not profitable. That may sound off, but, all businesses need to make a profit

Hi, thanks for your reply.
The 3a pillar is a Postfinance 3a Konto with a fix interest rate. No idea if they invest into mutual funds or anything alike... but to me, it sounds like a cash-only plan.

Also, you wrote

"It makes sense to report the growth each year in the plan. But that is all."

By reporting growth you mean report it as income (i.e. report the interest it made), or just report on FBAR / 8938 the value of it?

The PostFinance pillar 3a accounts can be kept in cash with a fixed interest rate, or invested in one of two balanced mutual funds. You can see the details on their site here.

This lady is amazing, I highly recommend her, to handle your tax filing here in Zürich.

Gaby J. Müller
lic. iur., dipl. Steuerexpertin

Müller Steuer & Rechtspraxis AG
Genferstrasse 33
CH-8002 Zürich
Telefon: +41 44 206 1660
Telefax: +41 44 206 1661

www.mueller-praxis.ch
www.atn.ch

Hi there, could you just clarify: so the foreign-earned income exclusion cannot be applied to 2nd pillar employER contributions. Fine, but line 21 would still be used to subtract the amount on form 2555 for someone claiming the exclusion for the rest of their income.

So how to use line 21 both to ADD the employER contribution amount while simultaneously SUBTRACTING the 2555 amount? Can it be done, or should the 2nd P. employER contribution go somewhere else like line 7 (as obviously it's not possible to move the 2555 amount!). By the way, what is "s.911" mean? I have seen you use it in another thread too. Thanks.

P.S: to jwalker46, Do you concur that 2nd pillar employER contribution is NOT excludable income on the 2555, contrary to your post further up? Thanks.

In 2011, I began to take regular payment from my 2ieme pillar (I chose not to cash it in when I retired last year. I now have a dilemma. If I read Article 18 of US/CH tax treaty, it appears I do not have to report this income, as I am a permanent resident in Switzerland. IRS office in Paris said I need to put this into the "other income" (line 22, form 1040). This completely pushes may way into taxes owed. What's the best ruling on this. If I leave it out, do I need to cite somewhere Article 18 interpretation? Or do I just leave this out as "income"? There are hints of answers in the thread, but I feel uncertain on this and would be glad of any advice anyone can give.

As a latecomer onto this thread, I find myself in similar situation, although I wasn't as smart by taxing everything in Switzerland before becoming resident in U.S., so I have to pay U.S. income tax on both 2nd/3rd pillar.

I moved in 2010, cashed out in 2011. The Swiss withheld the Quellensteuer on both pillars, which you can reclaim if you transfer into another pension plan (such as 401K). As my employer doesn't have such a plan and I have a W2, I had no option other than to distribute both pillars. I also got hammered on my 3rd pillar with Zurich (getting back less than I paid in after admin fees).

As a dual citizen, I never filed my taxes and am playing catch-up for last 8-9 years (only myself to blame for that). Can anyone tell me what is the best way to report contributions and how to calculate deductions? As I recall, the Lohnausweis does not provide company contributions, only personal contributions.